Health Savings Accounts: Assessing their impact on Insurance and Coverage Costs Stephen T Parente Roger Feldman Jean Abraham Jon B Christianson Funded by the Robert Wood Johnson Foundation Health Care Financing and Organization Initiative (HCFO) and the Department of Health and Human Services

Presentation Overview  Consumer Driven Health Plan Overview  Research Questions  Data & Analytic Approach  Plan Choice Estimation Results  Policy Simulation Results  Implications  Next Steps

‘Classic’ CDHP Model – Definity Health Definity Health Care Advantage Web- and Phone- Based Tools Health Tools and Resources Care management program Internet enabled Health Coverage Preventive care covered 100% Annual deductible Expenses beyond the HRA Health Reimbursement Account (HRA) Employer allocates HRA 1 Member directs HRA Roll over at year-end Apply toward deductible 2 Annual Deductible Preventive Care 100% Health Coverage Annual Deductible 1 Employer selects which expense apply toward the Health Coverage annual deductible. 2 Paid out of employer’s general assets. HRA $$

The Health Savings Account (HSA) Model HSAs legislated in MMA Pretty similar to Definity Health HRA Design except the consumers owns the account. Annual Deductible Preventive Care 100% Health Coverage Annual Deductible HSA $$

Economic Analysis Motivation  ‘Donut hole’ and savings account are new ‘prices’ to consider in the demand for health insurance with expected negative and positive responses, respectively.  Price sensitivity to different benefit options (i.e., premium, account, donut, coinsurance) could significantly affect take-up of CDHPs.  Builds on existing literature of high deductible health plans (HDHPs) (Keeler, Newhouse, Phelps, 1977). HSAs introduce a new kink in the budget constraint.

Conceptual Model of CDHP Money Medical Care CDHP Budget Coinsurance Plan Budget b a c Low Use Medium Use High Use

Data Sources  2002 health plan choice data from 3 large employers participating in a Robert Wood Johnson Foundation funded study on CDHPs Employee premium, deductible, coinsurance, worker’s age, gender, wage income, single/family coverage  2001 Medical Expenditure Panel Survey (MEPS) Household Component Linked Insurance Component  eHealthinsurance.com Individual HSA plan information

Plan Choice Model Analytic Approach  Plan Choices: HMO, 3 PPOs (low, medium, high), 2 CDHPs with Health Reimbursement Accounts (low and high)  Utility-maximization assumption where U hj =  j +  Z j +  X hj + e hj  Estimate a conditional logit model of plan choice using the pooled, employer data Explanatory variables  Plan attributes (Z) Annual tax-adjusted employee premium ($1000s dollars) Savings/reimbursement account size ($1000s dollars) Donut hole: difference between annual deductible and account size ($1000s dollars) Coinsurance rate (i.e.,.10 = 10% coinsurance)  Interactions between employee and plan attributes (X) Age, female, wage income, family contract  Plan-specific constants (  j )

Plan Choice – Descriptive Statistics

Price elasticity estimates from the plan choice model

Policy Simulations  Baseline take-up of HSAs from the Medicare Modernization Act of 2003  Simulation (1): Bush Administration’s proposal Refundable tax credit up to 90% of premium; maximum of $1000/adult, $500/child (up to two) Subsidy for singles with no dependents phased out at $30,000 adjusted gross income and $60,000 for families  Simulation (2): Low income buy-in subsidy  Simulation (3): Full subsidy of HSA premium  Simulation (3a): Full subsidy of HSA premium for “generous” HSA policy  Simulation (4): Full subsidy of HSA premium for the non-working, non- public insurance population

Cross price-elasticity* of uninsured take-up with respect to HSA premium subsidy * Calculated as the MEPS survey-weighted average of each person’s: - (pr uninsured|status quo - pr uninsured|Δ HSA premium) * (HSA quo/pr uninsured|status quo)

Cross price-elasticities of uninsured take-up with respect to “donut hole” and account

Cost per newly insured Estimated reduction in uninsured Total Estimated Annual Cost Per Capita Cost Administration’s Proposal (Sim#1) 2,924,949$8,075,081,354$2,761 Low-income Buy-In (Sim#2)4,495,887$12,219,668,960$2,718 Full subsidy (Sim#3)12,819,856$69,214,319,880$5,399 Full subsidy Generous HSA (Sim#3a) 23,507,540$211,118,893,800$8,981 Full subsidy Non-working (Sim#4) 3,143,487$11,234,374,714$3,574

Policy Implications  Take-up elasticity comparisons -.3 to -.4 in the non-offered population (Marquis et al, 2004) – Ours are similar.  Take-up elasticity increases as income increases. This contrasts with the literature. Why? Probability of HSA take-up is positively correlated to income (as opposed to an HMO, which is usually negatively correlated). Implication is that lower income population need more inducement to take-up an HSA  Plan design matters. Greater take-up from a reduction in the donut hole than an increase in the account size.

Summary  Premium, coinsurance and Donut can and ALL should be modeled when looking at CDHPs.  They different effects  Policy proposals will need to consider price effects to develop effective welfare improving social policy.

Next Steps  Refine the model to account for the following: Individual-level vs. Household-level Premium inflation assumptions  Examine impact of other policy proposals and/or HSA plan designs on take-up.  Look at HSA take-up versus retirement saving choice.

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Backup

Price-Sensitivity Estimates from the Literature  Take-Up Non-offered population [Marquis and Long, 1995; Marquis et al. 2004]  -.3 to -.4 Offered population [Chernew et al., 1997; Shiels et al., 1999; Blumberg et al., 2001; Gruber and Washington, 2005]  -.01 to -.2

Impact of the Simulations by Income

SIM Prep3 - Simulation Calibration  Applied CDHP employer plan choice model estimates to predict probabilities of plan choices for MEPS sample respondents  Model Calibrations  % of adults who turn down employer offers by income quartile  % of adults in the individual market who are uninsured by income quartile  Applied national weights to the calibrated model to represent the population 19-64, excluding full-time students, those enrolled in public insurance, and non-offered dependents with employer coverage through their spouse  Approximately million adults

Baseline Impact of MMA 2003 NOTE: Population is 19-64, non public insurance

Sim#1: Administration’s* Proposal NOTE: Population is 19-64, non public insurance. *Proposal as interpreted from February, 2004 U.S. Treasury Blue Book.

Sim #3A: Full Subsidy for Generous HSA NOTE: Population is 19-64, non public insurance